Although the world’s insurers and asset managers have stabilized amid a return of investor confidence, continued stability is not assured, suggests a new Moody’s Investors Service report.

“The difficulty of the recovery can be seen clearly in the struggles of insurers and investment managers; their macroeconomic indicators — and ratings — may have reached a bottom, but the fundamentals of financial institutions are still vulnerable to a number of uncertainties,” says Moody’s managing director, Ted Collins.

“It must be recognized that recent signs of recovery are largely due to the investment market stabilization resulting from broad-based intervention by governments around the world, which paved the way for a partial restoration of investors’ risk appetites,” he adds.

Unlike banks, the bulk of assets held by insurers and investment managers are traded securities that are marked to market, Moody’s says.

“Insurance industry capitalization, which had been heavily dented by realized and unrealized investment losses, is beginning to improve after the recent upswing in the equity and debt markets,” Collins states, “largely because investment portfolios have gained value, and many firms have rushed to raise capital via debt and equity raises.”

However, he warns that these gains could prove to be short-lived, “if market conditions deteriorate in response to recessionary pressures, disrupting consumer and investor activity.”

For most financial guaranty and mortgage insurers, which specialize in protecting against financial losses, the prospects for recovery are tied most directly to improvements in the residential mortgage markets, the Moody’s report notes.

As for investment managers, “the crucial challenge will be the transition to a world of more restrictive operating guidelines imposed both by market forces and regulatory oversight.” Collins expects that these changes will reduce liquidity risk within money market funds, but will also pressure profit margins and the overall business model.